How Insurance Companies Make Money: You get a letter that tells you how much money you need to pay for insurance. It has a lot of words and small writing, but you just want to know how much it costs. You can check your insurance to make sure you’re paying for what you need, but you might wonder if you’re paying the right amount.
When we give money to the insurance company, they save it in case something bad happens and we need help. Just like when we save money in our piggy bank for something we really want to buy in the future. Have you ever been disappointed by an insurance company not giving you the money you thought you would get? It’s normal to wonder how insurance companies make money. What do they do with the money you give them?
The Business Model
You get a big envelope in the mail with papers about your insurance. You’re looking for how much it costs. You can check what your insurance covers and how much you pay to make sure you’re getting what you need. But you might wonder if you’re paying for things you don’t really need. What does the company do with the money I give them for insurance? Have you ever felt disappointed when you didn’t get the money you were supposed to from your insurance company? It’s normal to wonder how they make money. But, do you know what they do with the money you give them?
How Insurance Companies Make Money
If the insurance company has to give more money back to people than they got from them, they will have a big problem. To avoid this, they use the money you give them and invest it so they can make more money and stay in business. When you pay for insurance, the company makes some money from it. They use some of it to run the business and make a profit. Sometimes, they might charge extra fees that also make them money.
When people pay money to an insurance company, some of it goes into investments. The company picks where to invest based on what will make them the most money. They usually choose things like corporate or treasury bonds. This helps the insurance company stay in business. Insurance companies make money by selling a product that helps people when something bad happens. They don’t need to spend as much money as other companies that make things like phones or toys.
But they still need to pay for things like paperwork and lawyers, so they include those costs in the price they charge for their product. Insurance companies need protection too, so they buy something called reinsurance. Reinsurance helps them by sharing the risk of big payments. That way, if something really bad happens, they won’t lose as much money.